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The most controversial provision of the Affordable Care Act is the adoption of the individual mandate, requiring all Americans to maintain some form of health insurance. As of January 2014, the individual mandate provision of Obamacare requires that all U.S. residents maintain minimum essential coverage when it comes to health insurance or pay a penalty for not doing so.
What is the individual mandate and why does it exist?
One of the main goals of Obamacare was to provide guaranteed issue, the requirement that the health insurance companies would cover anyone who applied for insurance on the individual health insurance market. Prior to this regulation, insurers that sold plans on the individual market could refuse coverage for those consumers that may have health conditions that would warrant higher costs. This left many people who may have wanted insurance coverage to go without. In order to accomplish this goal without disrupting the existing private health insurance system, the Affordable Care Act needed to ensure that the insurance carriers would permit anyone to enroll for a plan.
If everyone were guaranteed coverage, those with high healthcare costs would be those most likely to sign up. An insurance pool that was made up solely of those with high costs would force insurers to charge astronomically high prices, leaving these consumers no better off than they were before. To make the system work, Obamacare needs to spread these costs out among those who have much lower healthcare costs and effectively pay more than they use. This is where the individual mandate comes in. By forcing the healthier demographic, who would be net contributors of money into the insurance pools, the insurers could provide coverage to the population at large at more reasonably affordable premiums.
Enforcing the mandate with penalties
While it's called a mandate, the federal government can't actually force anyone to purchase insurance. Instead, the enforcement mechanism is through a tax penalty for not having coverage in a given year. Individuals without coverage are assessed a federal tax liability when they file for their income tax returns. The amount of the penalty is the greater of a flat dollar amount or a percentage of your household income. The total penalty is adjusted based on the number of people in the household, with dependents under the age of 18 assessed at half the normal rate.
Both the flat dollar penalty and the percentage of household income growth over time.
- In 2014: $95 per individual or 1% of the household's income in excess of the tax filing threshold with a cap on the flat dollar penalty at three times the individual flat dollar penalty.
- In 2015: $325 per individual or 2% of the household's income in excess of the tax filing threshold with a cap on the flat dollar penalty at three times the individual flat dollar penalty.
- In 2016: $695 per individual or 2.5% of the household's income in excess of the tax filing threshold with a cap on the flat dollar penalty at three times the individual flat dollar penalty.
- After 2016: The flat dollar penalty will be indexed for inflation.
The annual penalty for an individual is capped at an amount equal to the national average annual premium for a qualified health Bronze Level health plan available through the state Exchange. In 2014, the national average annual premium for the qualified Bronze Level health plan is $204 a month per individual, (IRS Procedure 2014-46). On an annual basis, this is $2,448 per person.
Calculating your individual mandate penalty
The amount you owe when it comes to the individual mandate penalty is based on the number of months where any individual in your family goes without coverage. For 2014 the tax filing threshold is $10,150. The annual penalty rates for some sample household sizes are displayed below. For each month that someone is without coverage, they will be responsible for 1/12th of this annual amount.
Married + 1
Married + 2
Individual mandate exemptions
While the mandate covers all US residents there are a number of exemptions built into the penalty fees which effectively exempt some people from needing to have coverage. The following is a list of the criteria that may exempt you or your household from the mandate and associated fees.
- Short Coverage Gap Exemption (3 months): If you are uninsured for less than three consecutive months, it is considered a short coverage gap and will not cause you to incur the penalty fee. Once this threshold duration is exceeded, however, the full length of time where you lack coverage will be used to assess your penalty.
- Income Below Tax Threshold: In 2014 anyone with a household income under the tax filing threshold of $10,150 for an individual will be exempt from the individual mandate and the ensuing penalties. Households that do not earn enough to be required to file an income tax return are free from both the mandate and penalties.
- Unaffordable coverage: If the cheapest available plan after tax credits/subsidies are included will cost you more than 8% of your household income, you will be exempt from the mandate and penalties.
- Religious Objection: Anyone who is part of a religious group that is opposed to accepting insurance benefits can be exempt from the mandate. Determining which groups are recognized as qualifying for this type of exemption is determined by the Social Security Administration.
- Hardship Exemption: Consumers that have experienced some life even that qualifies as a hardship can apply for a hardship exemption with the Marketplace. Hardships may include any events that may have caused significant increases in personal expenses that would prevent a household from being able to obtain coverage. The test for hardship can include whether paying for the plan would force them to choose between food, shelter clothing or other necessary items. Further guidance on the hardship exemptions can be found in the following CMS Guidance: Report
- Member of Recognized Indian Tribes: Members of Indian tribes that are recognized by the federal government are exempt from the mandate. The list of tribal entities can be found in the Indian Affairs Tribal Entities List. While tribal members may be exempt, the insurance exchange can provide new health coverage benefits for tribe members. This includes a number of zero cost-sharing plans that can offer significant value when it comes to coverage.
Why wouldn't I just pay the penalty?
While it's certainly possible that the cost of insurance might be higher than you will have to pay in terms of penalties, realize that in doing so you would also be forgoing health insurance coverage that does provide financial benefits. With caps on the number of penalties equaling the average cost of a bronze plan, the penalties are designed such that you can either pay them to receive no coverage or simply pay for coverage at a similar rate. As the penalties rise in 2015 and 2016, the economics between getting a plan and paying the penalties will shift.
What does Obamacare/ACA define as "minimum essential coverage"?
Individuals are covered with minimum essential coverage if they have coverage in any one of the following:
- Government-sponsored health care programs such as Medicare, Medicare, Children's Health Insurance Program, TRICARE, coverage from Veterans Affairs or Health Care for Peace Corps
- Employer-sponsored health insurance plans and other plans offered in the small or large group markets
- Individual market plans available on and off-state exchanges, as well as grandfathered plans